Creating Markets: Are PPPs the Answer?

If they are designed and implemented well, infrastructure PPPs ‘can deliver the goods’: mobilize private sector finance, help the public sector improve its procurement skills for the preparation, selection and design of infrastructure projects; transfer risks from the public to the private sector; achieve on-time and on-budget project execution; and ensure adequate service operations and maintenance.

Under the Maximizing Finance for Development (MFD) agenda, the World Bank Group (WBG) has outlined a new approach that prioritizes private financing and sustainable private sector solutions to help countries achieve the Sustainable Development Goals by 2030.

With its potential to attract private funding, design expertise and operational know-how, many view Public Private Partnerships (PPPs) as an example par excellence of private sector solutions that can help build infrastructure, deliver access, and provide quality services.

Much hope, therefore, rests on PPPs to help mobilize an estimated $1.8 trillion every year, the amount needed from the private sector to bridge the investment gap to achieve the SDGs. Most of these funds would flow into construction of basic infrastructure such as roads, railways, ports, power stations, water and sanitation. But is such hope realistic or overstated?

PPPs have the potential to deliver…

Photo by Li Lou, World Bank

If they are designed and implemented well, infrastructure PPPs ‘can deliver the goods’: mobilize private sector finance, help the public sector improve its procurement skills for the preparation, selection and design of infrastructure projects; transfer risks from the public to the private sector; achieve on-time and on-budget project execution; and ensure adequate service operations and maintenance.

By contrast, poorly structured PPPs can quickly materialize high risks, and create many headaches for the public sector and private parties involved through a variety of unwelcome developments. Overly optimistic demand forecasts, for example, can quickly turn into insufficient revenue and lead to bankruptcy or public-sector bailout; poorly designed payment mechanisms can result in excessive tariff increases creating affordability problems; inefficient provision of government guarantees can have severe fiscal implications through the related contingent liabilities.

Hence, for PPPs to help deliver adequate services and create markets for infrastructure, a good understanding is required of the underlying incentives of the private parties involved and of the political economy factors that contribute to successful outcomes.

Political commitment. PPPs breed and grow in the presence of a stable political commitment that is often overlooked. IEG’s 2014 PPP evaluation found that lack of political commitment was responsible for 50 percent of failed attempts by the WBG assistance to client countries in structuring PPPs. Creating political commitment, however, is not the same as “lobbying” for PPPs. The latter may result in a fragile commitment based on uninformed or biased political consensus, which increases the risk of PPP failure.

Sector reforms. Adequate laws, regulations and institutional capacities are well-known necessary conditions for PPPs to succeed. However, those sector reforms are not easy to achieve. Despite the WBG’s leverage and country presence, IEG’s 2014 PPP report found that sector reform success was manifest in only 55 percent of World Bank PPP loans. While government commitment explained a lot, other factors contributed to success, for example, a smart sequencing of Bank Group’s interventions and the continuous engagement by WBG institutions in a country --over several years and project cycles-- as sector reforms often took longer than anticipated. The 2016 IEG evaluation on “transformational” change corroborated the lesson that best PPP results were achieved when WBG used a comprehensive approach to stimulate and sustain systemic change, supported by several interventions.

Being inclusive. Early engagement with stakeholders, building broad coalitions and political consensus early in the PPP process, can build support and maintain momentum behind sector reforms. Likewise, according to IEG reports on PPPs and transformational engagements, when structuring specific PPP deals, early and broad-based stakeholder consultations is the most decisive factor to turn initial “troubled” PPP projects into successful ones. The Bank Group’s efforts in the Senegal water sector, for example, illustrate well that building consensus among broad stakeholder groups, including unions, civil society groups and donors, pays off. The Senegal urban water sector now ranks among the top performers – owing its success to a well-performing institutional and contractual framework with the creation of a public holding company (SONES) in charge of managing the sector assets and recruitment of a private operator (SDE) to operate the urban water facilities and deliver water services.

National capacity. IEG’s 2014 PPP evaluation found that client countries generally lack the skills and resources to prepare a pipeline of bankable PPP projects to attract private sector participation. Many countries procure a few PPPs only, which is a disincentive to build capacity. Yet, successful PPPs require government authorities to be able to assess the bankability of PPP projects and to manage the fiscal risks associated with PPPs, basing their decisions on a sound comparison of the pros and cons of the PPP option compared with standard public procurement. Adequate monitoring of the performance of PPP projects to protect and defend the public interest in the case of PPP contract re-negotiations, for example, is also a national capacity fundamental. The Bank Group’s work in Colombia along with other development partners, demonstrates that building national capacity and developing an institutional set-up to handle PPPs is worth the investment: In the last six years, Colombia has made significant progress in developing PPPs, including the development of the Fourth Generation (4G) Toll Road Program.

Uncertain future for PPPs

Perhaps the difficulty of putting in place all the above fundamentals, including the complexity associated with PPP arrangements, explains the recent decline in private sector participation in infrastructure. According to the 2016 World Bank Private Participation in Infrastructure (PPI) Database, the year 2016 experienced the lowest level of investment commitments compared with the previous 10 years. The volume of PPPs in 2016, for example, decreased by 41percent compared to the preceding five-year investment average of $121.4 billion.

This evidence points to the importance of the “Cascade Approach” in the Bank group’s MFD agenda, with its focus on remedying the obstacles that block private sector solutions. Helping client countries identify sound PPP opportunities and subsequently “de-risking” those through regulatory reform and building of national capacities appear more relevant than ever.

[NB: This is the third blog in the Creating Markets blog series. The motivation for the blog is to share lessons from relevant IEG evaluations early enough to help the Bank Group be successful in its systematic implementation of the Creating Markets concept.]

Comments

An excellent blog, and very much aligned with our findings from an independent evaluation of 10 years of experience with PPPs in infrastructure in the Inter-American Development Bank (www.iadb.org/ove/ppp), which found that a thorough analysis of whether the environment is appropriate for a PPP and whether a PPP is the most appropriate option in a specific context is essential. It also found that strong collaboration between the public and private sector sides of the IDB Group is essential. It was good to see strong follow-up to the evaluation at the IDB, including a presentation together with IDB operations to discuss the findings and how to move forward (here is a link to the video): https://www.youtube.com/watch?v=6506v-3yKjs

Thank you Roland. It is interesting that many factors determining the success or failure of PPP arrangements are common across regions, including those our blog highlights. Another relevant finding from IEG's PPP-related work, which coincides with the IADB's infrastructure PPP evaluation your comment refers to, is the importance of a good organizational framework, the right skill mix, and staff incentives. Without those in place, IFIs tend to struggle to develop a PPP pipeline.

I am of the view that decline in PPP portfolio is not due to dearth of proper structuring and concession managing skills. We seem to have enough of that.
The issue is we are not able to take the PPP projects to its full life i.e. till the end of concession period. 25/ 30 years is too long a period for the assumptions/ basis of project structuring to be valid/sacrosanct. No doubt, the renegotiation (I would prefer to use the word restructuring) of concessions faces the issues of sanctity of contract, competitive bidding adopted while awarding the project and similar transparency issues but we do not have any option except to accept it.
So many in this field, feel the necessity but are not going ahead fearing from subsequent scrutiny by Regulating Agencies. The only way to handle it is to have transparent and detailed guidelines and implementation framework on the subject with least subjectivity.
To me this appears to be the most important step to arrest and reverse the declining trend of investment in PPPs.

Great blog and many good ideas poured on it. However, time and again the picture about what "institutional" investors are after is often lost. This investors are investing someone else's money and their earnings are attached to successful transactions. Therefore, they are as adverse to risks as any other financial institution, or even more.

Greenfield projects, which account for the majority of the projects within those $1.8 trillion, are risky proposals that can barely capture a fraction of the money that those investors are able to mobilize, and as long as there are projects in the developed world, where the rule of law and the experience in this arrangements is already in place, projects in developing countries will be always a second or third priority, when not an exotic testimonial intervention, but rarely a tendency that will overcome the shortage of funding for infrastructure where is needed the most.

The ones that take the initiative in developing those infrastructure remain pretty much within the developers and contractors with limited resources for bidding and investing, but they cannot be locked in on many projects an in many places. Most PPP frameworks developed do not acknowledge the possibility to change the share ownership or securitizing those assets, making it possible for other investors to take stakes on the capital once the business have become less risky.

More than another guideline, or legal frameworks that are hard to enforce, these projects need to diminish the risks inherent to any new development and opening to the possibility for these institutional investors to invest on a fully functional system proven to produce results may be a step forward. Certainly the $ 1.8 trillion figure will still be needed to get the projects in place, but the moment that there is a secondary market feeding on projects developed, will certainly make easy to mobilize the primary market necessary to help those developers to carry on with the primary risks.

No. If it is about globe or even bottom 40's. PPP's vary in accordance to the capacity, capabilities and most importantly will of state or governance structure and private individuals including multi national's demand and requirments. This is only possible when initiatives of PPP were designed, fixed with goals and time lines. Just wondering if sufficient research data findings available specifically for PPP sustainability is authenticated data? Don't we feel for more research with action's?

What I understand it's wise to experiment focusing individuals rather than group's, organisations and companies especially non profit, it's an amazing debate to discuss forget them at moments but essence of time is to realise the realities and justifications for quality, design and impact especially the region who are supposed to be beneficial.
Policy analysis very common terminology now a days but amezed to know anyalsis against what.
Fixing many things would be great before problem specific solutions. Law, regulations, functionary bodies of the state, what kind of governance structure opted, resources avaliable and required, demand of every human after globalisation through information technology.
Geographical, rule of law and sincere approaching efforts towards human development alliance with local demands will be hopefully core component of the idea with visible and measurable tools.

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